Some Thoughts on 2010

So we took off the last bit of 2009, and the first bit of 2010, and after coming back to it, we realise we still have nothing in particular to say. That, however, has never stopped us before, so we look forward to another year of fun and games on the world scene, as the 2007 Depression rolls on. Since 2010 is still figuring out which way is up, we thought we'd offer some ideas as to how the year is going to look.

Previously, we called 2009 the Year of the Whinger; boy, were we ever right (insert back-patting here). The banks whinged, and got money; the health insurance companies whinged, and will probably get money; the auto manufacturers whinged, and got money; the home-builders whinged, and got money. Come to think of it, the only people who whinged and were ignored was the Citizenry, of the various countries which forked over said money, who really didn't want all the aforementioned whingers to get all that money. Oh well, they don't know what's best for them, now do they? Don't they know that they need autos, and health insurance, and banks, and home-builders? Why, what would a modern economy look like without these centrepieces of industry? Perhaps they'll learn better.

At any rate, this year, 2010, is certainly shaping up to be quite the doozie, what with the U.S. Treasury removing - not raising, but eliminating - the cap on how much money can be poured into the haemorrhaging enterprises known as Fannie Mae and Freddie Mac. Additionally, justice has been thrust to the side, with a U.S. judge throwing out a murder case against Blackwater agents (i.e. U.S. mercenaries), because the Government prosecutors botched, perhaps purposefully, the case. And the U.S. Transportation Security Administration is hounding a pair of bloggers who published the details of supposedly super-secret security directives. Say that last part ten times as fast.

But what will 2010 be, you ask, dear Reader? Well, we're getting to that. 2009 saw corporate powers across the globe - but perhaps most spectacularly in the United States - with their collective hands out, begging to be kept from going under. At the same time, we see that being the point where those same corporate powers have cemented their control over the Governments which gave them the money, to the detriment of the Citizenry to which a Government is supposedly responsible. This year, we see the fallout of that move start to make itself evident.

Simply put, the moves, for instance, by Goldman Sachs in the U.S., are of such a patently, and odiously, self-serving nature, it doesn't take a genius to figure out the Citizenry has gotten screwed so that Lloyd Blankfein can keep his $43 million a year for doing God's work - oh, we wish we had thought of that one! At the same time, we have a sneaking suspicion that the world markets will take their next big nosedive toward their final destination, which is a 90% drop or so from the peak.

Do you hear what we hear? Yes, the gnashing of teeth: those who got bailouts will grumble they did not get enough bailout; those who will pay for all the bailouts will grumble about how there is already too much slop in the trough. Both sides will be gnashing, and foaming at the mouth; take a look at the latest bailout of GMAC, as an example of what we're talking about. There will be many, many more bailouts, and we would like to be on record as saying this is the year the FDIC will need a direct bailout to keep operating. Ted Butler, we hear, recently stated that 2010 is the year when JP Morgan Chase closes its heart-stoppingly humungous silver and gold short positions; we'd like to put ol' JP on that list of bailouts-waiting-to-happen, too.

Simply put, this will not be a pretty affair, and might indeed result in the civil unrest which James Kunstler and Gerald Celente have been ranting about for about a year already. It could certainly result in the loss of legitimacy of the most bailout-happy Governments, as their respective Citizenry will see continued, extremely unpopular, bailout-age as a sign those Governments are no longer responsible. History has shown that, when Governments no longer seem responsible, they tend to become quite despotic and oppressive, to keep an increasingly restive population under control.

So, we posit two trends: the teeth gnashing on the part of corporate interests, screaming for another series of big bailouts, to ensure their primacy in a depressionary economy; and the teeth gnashing on the part of Citizens, riling against both the previous bailouts, and new bailouts being forced down their throats. Governments will respond to these two, conflicting demands by funnelling vast amounts of money, either directly or indirectly, to their corporate masters; whist simultaneously increasing the bread and circuses for the masses to keep them placated and obedient.

There you have it, then, dear Reader: 2010 is the Year of the Teeth Gnashers. The two different poles of the gnashers - i.e. the Citizenry and the corporate elite - will attempt to pull on Governments to be aligned more strongly with one, against the other. Unfortunately for the Citizenry of the world, they have already lost this fight, probably a long time ago; the corporate interests have the field, as it were. If those interests are smart, which they might or might not be, they will recognise the need to maintain the illusion that Governments are still responsible to the Citizenry, and make token gestures of hollow sacrifice. This, coupled with a sharp uptick in bread and circuses, will likely be enough to keep the Citizenry of the world in check, and docile.

We would like to make it clear, though, that we don't quite see massive civil unrest, a la James Kunstler or Gerald Celente, happening this year. This is not to say the possibility isn't there, of course - the 18th Century French aristocracy assumed the rabble would simply take their lumps, as it were, but those same aristocrats all had their heads chopped off during the Revolution. However, we feel that Governments will be able to maintain the illusion of responsibility to their respective Citizenry through most, if not all, of this year. Next year, 2011, we think all bets are off; we could see that being the year when even major OECD Governments start to loose their aura of faux responsibility.

However, if civil unrest does occur this year, it will likely be in those countries where the Citizenry has a long and noble tradition of taking to the streets. France, Greece, and Italy, for example, are the most likely, in our mind, to see some form of uprising, along with Spain and Portugal. The United Kingdom is a lesser possibility, along with the rest of the core counties of Europa (i.e. Germany, et cetera); Canada, Australia, Russia, and Brasil are not likely to see revolts, as those populations are either relatively docile, or well-policed. The United States, as the most docile and beaten-down country on the planet, will almost certainly not see anything resembling unrest. China, though, is the wild-card, in our mind: it will either have no problems whatsoever, thanks to the famous heavy hand of Communism, or it will completely blow to pieces, taking any mirage of a recovery down with it.

We end with a little tune, sung to Old MacDonald Had a Farm:

Ol' Lloyd Blankfein had a trough,
E - I - E - I - N!
And in that trough he poured some slop,
E - I - E - I - N!
And some slop! slop! here, and an oink! oink! there,
Here some slop, there an oink,
Here some slop, there an oink!
Ol' Lloyd Blankfein had a trough,
E - I - E - I - N!

Ol' Lloyd Blankfein did God's work,
E - I - E - I - N!
...et cetera...

U.S. Monetary Policy Does Not Make a Strong Dollar

U.S. Secretary of Treasury Timothy Geithner recently stated that: "Given the dollar’s role in the international financial system and the significant impact of the U.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play... The policies of the United States are designed to lay the conditions for a strong dollar and more stability in the international monetary system."

Say what, Mr. Secretary?

There is a serious disconnect in Mr. Geithner's reasoning in this statement. Although it is true that the U.S. Dollar has been comparatively strong in recent days, we hazard to say that this is probably a temporary state of affairs. As ShadowStats.com shows, the Dollar has experienced a relative peak, but is is, as of July 6th, in a steep decline. Additionally, deflationary trends to the tune of about 2% has apparently developed, rendering every dollar in circulation slightly more powerful as time goes on.

However, we posit the exchange strength of the Dollar is liminal; the currency markets are probably changing their minds about the relative value of the Dollar. More telling, though, is the continuing growth of the M1 Money Supply - physical cash and currency in chequeing accounts. That section of the Money Supply is increasing at a whopping 18% annualised... and shows no sign of slowing.

It is that growth which will, eventually, kill the U.S. Dollar, and destroy the wealth of any holders of Dollar-denominated financial instruments (be they savings bonds or Treasury Bills). The Federal Reserve is desperate to prevent any deflation whatsoever, as deflation makes debts all the more painful to the indebited - think the U.S. Government. So, the Fed is pumping up M1 as fast as the printers can press new currency, in the attempt to stoke inflation and thus lessen the pain for the indebited.

We have faith in the Federal Reserve. They may be bumbling and rather silly, but we believe they'll get this stoking-inflation thing down pat. The question, in our minds, is not if, but when. When will the inflation rate rise to once again destroy purchasing power at a rate the Fed finds agreeable?

When that finally happens, and happen we think it shall, Mr. Geithner's "strong dollar" talk will at last be seen as the hot air it really is. We suspect that many investors in U.S. Government debt will see the handwriting on the wall at some point, but there will be many, many investors who will be horribly damaged by the looming inflation. We also suspect those investors will be none too happy with the United States, nor with Mr. Geithner. Hopefully he has his ranch in Argentina already bought and paid for...

Ireland Doesn't Need a Bailout?

Anyway you look at it, Ireland's economy is in shambles. The formerly fastest growing member of the EU is now the fastest shrinking - with a rosy, Government forecast of -8% change in GDP this year.

Finance minister Lenihan defiantly claims the nation does not need a bailout from the EU. He defiantly claims that in spite of his staggeringly expensive (1/2 annual GDP equivalent) rescue of the Irish banks, "there will be no bailout of the banks."

The government, not having the luxury of being able to print up money, is being forced to raise taxes to service the new debt as well as meet existing obligations in the face of what would otherwise be rapidly declining tax revenues. This, of course, will soon be seen as a fatal policy blunder. Raising taxes in a Depression is, as everyone who was paying attention in economics class knows, a big no-no. It is taking money out of the hands of the people when they need it most.

Mr. Lenihan is merely a crony and cannot exactly be blamed for this misstep. Presumably, some policy wonks in the Irish Finance Ministry - taking a cue from the Yanks perhaps - are thinking (in Irish Gaelic, of course), "If we reliquify the banks, they will lend again and people can buy houses again, 'n stuff." So pinching the average worker is an acceptable trade-off.

We'll bet any taker that Irish banks won't do squat to revivify the Irish economy, and that the masses are going to have to cut spending even more. We sense a vicious cycle forming.

The end state will be Ireland out of the EU (sans bailout) and its economy worse off than it has been in decades. Emigration will not prove the safety-valve it has in the past as the former destination lands will look less kindly on newcomers. We suspect Ireland is where damage from the 2007 Depression may be most acutely felt, completing the rags-to-riches-to-rags cycle.

Tragedy, or Farce?

With the latest joke rolling out of the Zimbabwe Central Bank, we wonder why such ridiculousness is able to thrive so long. In all honest, we feel that a $100 trillion note is probably Farce, but we really cannot be certain.

The history of Zimbabwe is most definitely one of Tragedy: a nation in continual economic collapse, aided and abetted by non-stop embargoes brought on by the United Kingdom and the United Nations, among others. The fine, upstanding governments of the world really know how to dole out "change," don't they?

It seems in history that every Tragedy has a correlating, and larger, Farce. In this case, the Farce is the embargoers -- the United States, the United Kingdom, the European Union -- following in the footsteps of the Tragedy they helped create. Many policies, such as price controls and rapid expansion of national money supply, have been well-tested by Zimbabwe's central bank.

In the flaming tailspin of the 2007 Depression, this collection of nations are flirting with the very same financial policies that Gideon Gono used to make Zimbabwe's hyperinflation-from-Hell. As the Wikipedia article notes, perhaps ironically, Mr. Gono is a "proved deflation-fighter." Mr. Bernanke, of the Federal Reserve, M. Trichet of the European Central Bank, and the Rt. Hon. Mr. Darling of the Bank of England are all working to fight deflation, as well.

They might not have noticed, but they're following in the footsteps of a failed nation.

Dark Clouds over the Eurozone

In a wee little article, Bloomberg released the news that the United Kingdom will not be allowed to join the euro. As a friend of ours noted, the shorter the article, the worse the news. In this case, it means that the European Union is going to let the pound sterling hang in the wind, as it were. This will not be good for the pound, of course. One of the big hopes for the pound was the possibility for exchanging them in for new, shiny euros.

British Parliament, figuring they have nothing to lose, is deliberating on whether or not to loose the dogs of war: quantitative easing. By allowing the Bank of England to delay its reporting of the amount of money it's pumping into the U.K. economy by a month or so. It's not like the Bank knows what it's doing anyway, but this move ensures the pound sterling will die a screaming, hyperinflationary death.

As if to rub salt in and rub sandpaper over the festering wound is this charming piece from the London Times. The action of taxing savings accounts will amount to nothing more but confiscation, a rape of savers in order to 'restore prosperity.' We suppose the mindset is, 'if you won't spend it, we will!'

Although this problem is presently only the United Kingdom's, it is not isolated from the rest of the Eurozone. If it appears that the Bank of England's efforts are working, the rest of the European Union will not be far behind in implementing similar policy. As central bankers are a reactive lot, and not anticipatory, the Eurozone will not see the doom of the pound sterling -- and indeed the euro itself -- until hyperinflation has already murdered the currencies.

The Impact of Government in a Shrinking Economy

Volumes have been written on the effect of government spending on economic growth. Observers of nearly all political persuasions (anarchists and totalitarian communists aside), believe there is an optimum point of government involvement in an economy. An economist by the name of Richard Rahn came up with his eponymous curve which attempts to use empirical data to plot growth rates in GDP versus government spending as a share of GDP. Unfortunately, Mr. Rahn's methodology's scientific efficacy is debatable, but it is intuitively obvious that there must be some point of optimum (if it isn't intuitively obvious consider this: in a state where there is virtually no government spending, economies collapse as crime and piracy run rampant - e.g. Somalia; and when government makes virtually all the economic decisions you end up with another kind of failed economy - e.g. the Soviet Union).

All other things being equal, the spending of governments would tend to fall along with the economy in the 2007 Depression. As income declines, so do tax receipts. States of the USA have to balance their budgets (more or less) and so must cut spending to match the decline of taxes. The US Federal Government (along with most other national governments) has no such restraints, and much is being made at present of how much deficit spending to make to 'help' the economy. Could too much government spending go past the point of 'help' and into 'hurt'? How much of the economy can be in the government's hands without collapse setting in?

The EU government spending as a percent of of GDP has tended around 50%, while by comparison, the USA has tended around 40%. If the OECD economies contract by 50% and government spending does not shrink along with it, the percentages will rise to 100% and 80% respectively. Obviously, this is well past the optimum.

At some point into the 2007 Depression, governments will likely be forced to shrink. This will not be a matter of libertarianism, but of practical economics. Painful choices will be made, some of them critical. Health care, education, national defense, police, fire departments, food stamps, pensions? Where will the axe fall?